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Instead of fiat currencies, however, they’re pegged to commodities—typically gold. For example, if Company B has $10 billion of their stablecoin in circulation, they will need to hold $10 billion or more in gold in their reserves for the stablecoin to be usable. A stablecoin is a cryptocurrency whose value is “pegged” (meaning tied) to another asset—often a traditional fiat currency like the US dollar. For example, one unit of a stablecoin that’s pegged to the US dollar should always be worth $1. For instance, a stablecoin issuer may promise to hold $1 in a bank account for each of the cryptocurrency coins it creates. As long as the collateral (or reserves) are available, coin holders know that they’ll be able to exchange a coin for $1.
Remittances and Payments
Additionally, the company has yet to default on any redemption request. Our proposed rules are to regulate stablecoins that would become widely used for payments in the UK. The Bank of England wants companies that issue stablecoins used mainly for payments, to issue them in a safe way.
Decentralized Stablecoin
- Stablecoins allow investors to move in and out of different cryptocurrencies while staying within the cryptocurrency realm.
- But, because stablecoins have a stable value, people may start using them more to pay for a wider range of things.
- An example of this is TrueUSD (TUSD), which uses Chainlink to bring details of collateralization levels on-chain and give users a clear understanding of whether their assets are fully backed.
- You can buy BUSD on Binance, and redeem the stablecoin from Paxos if needed.
- Meanwhile, SwissRealCoin is a unique stablecoin backed by a portfolio of Swiss real estate.
Rather than buying physical gold, one can simply purchase PAX Gold (PAXG) tokens that are pegged to their real-world price. One of the most popular crypto-collateralized stablecoins is dUSD, minted by Ardana through its Ardana Vaults service. Ardana created dUSD to serve as the native stablecoin of the Cardano (ADA) blockchain, with the idea being to inject more liquidity into its growing decentralized finance (DeFi) ecosystem. As crypto adoption continues to grow and further utility is rolled out, stablecoins will play an ever-increasing role in the industry.
Why use stablecoins?
These differ considerably in their form and usability but are all backed by investment-grade gold. Experts say the DAI stablecoin is overcollateralized, which means that the value of cryptocurrency assets held in reserves might what is a stablecoin be greater than the number of DAI stablecoins issued. Most users, especially newcomers to crypto, buy stablecoins on a centralized exchange, such as Binance or Coinbase, by using fiat currency or other cryptocurrencies.
Exchanges like Coinbase may offer some stablecoins, but such centralized exchanges may list fiat-backed versions only. For more options, you could use a decentralized exchange to swap any existing tokens for most stablecoins. It’s important to note the risk of depegging may be higher for algorithmic stablecoins than for other types that have sufficient and transparent reserves. During the same time, the broader crypto market was experiencing a sell-off. Both these factors occurring simultaneously sent the stablecoin spiraling, making it essentially worthless overnight. Second, because cryptocurrencies are usually more volatile than other assets, these organizations typically hold more in their reserves than the amount in circulation.
This does not mean that stablecoins have no chance in this space, however. They are being used by some players already – and are likely to be working under the hood for many other companies who have not publicly discussed their use – and so are clearly proving to be the favored option for some use cases. What it does mean is that they will only see growth if they can continue to win out against non-blockchain-based alternatives – and that won’t be all the time or for every payment type.